They call  it ‘the VAT trap’. And tourist businesses in Wales are taking extreme measures to avoid it. Apparently many Welsh tourist businesses are closing down during the winter to avoid being tipped over the VAT threshold, with all its complexities. It’s leaving some tourist spots completely closed outside the main tourist season, which in turn is affecting local economies.

The problem is that although the UK has a very high threshold before you need to register for VAT, which is great for businesses selling to other non VAT registered businesses and consumers, many other EU countries have a very low rate of VAT on so-called “tourist supplies”, restaurants, accommodation and so on.

The Aberconwy Conservative MP Guto Bebb is worried that the £80,000 VAT threshold is acting as a barrier to growth in the country, and revealed how many smaller Welsh businesses would rather close down in the winter, when the tourist trade is thinner, rather than join the VAT system.

Britain’s tourist industry at a competitive disadvantage

Many experts believe the current British VAT arrangements put the nation at a competitive disadvantage compared to other countries. What’s the problem? It appears that once you hit the £80,000 mark you suddenly have to earn at least £30,000 more per year to make up for having to pay the tax. Tourism is Britain’s fifth biggest export industry, forecast to grow by at least 6% a year, and it already hands over £6bn or so to the exchequer.

At the same time there are calls to cut VAT on hotels and visitor attractions, a move which pressure groups say would generate a whopping £3.9 billion in extra tax over a decade as well as boosting the entire economy to the tune of £4 billion and creating more than 120,000 new jobs.

Cut VAT to generate more cash for the nation

The research, which was undertaken by Nevin Associates and commissioned by the Cut Tourism VAT campaign, reveals that while cutting the tax from 20% to 5% would affect the Treasury’s coffers, it would do very well out of the change in the longer term, winning an extra £261 million in corporation tax from the leisure sector plus £231 million from higher income tax takings. Better still, there’d be fewer benefit payments made and an extra £1 billion or so revenue from businesses supplying the tourism industry.

What about your business?

Do you expect to pass the £80,000 threshold this financial year? If you don’t know, how can you predict it? When should you start to make plans, how do you set the whole VAT thing up, what are the risks involved and is it possible to follow the Welsh tourist industry’s lead and shut down for a short time rather than go.